If all you did was add hubs to the front axle and not a part time kit in the 203 itself, you need to run it in the LOCK position when the front hubs are unlocked. I think your linkage is out of adjustment, so you cant get the shifter all the way to the lock position.
Give this a try:
"The 203 full time 4-wheel drive transfer case is the only one on which linkage adjustment is possible.
Place the selector lever in the cab in the Neutral position.
Detach the adjustable rod ends from the transfer case levers.
Insert an 11 / 64 in. drill bit through the alignment holes in the shifter levers. This will lock the shifter in the neutral position with both levers vertical.
Place the range shift lever (the outer lever) on the transfer case in the Neutral position.
Place the lockout shift lever (the inner lever) on the transfer case in the unlocked position. Both levers should now be vertical.
Adjust the rods so that the linkage fits together. The indicator plate can be moved to align with the correct symbol.
Remove the drill bit."
I got this from http://www.justanswer.com/chevy/63fu...e-linkage.html
Some nice pics there, the shifter also is bad for getting mud and stuff stuck up inside it. Try and get it cleaned out and lubed, then adjust and see if that helps the situation.